India Inc. beats the blues

D. Sampathkumar

ABOUT four times as many companies turned sick in the last three years than they did in the years immediately preceding them.

Between 1997 and 1999, as many as 1,200 companies in the private sector were referred to the Bureau of Industrial and Financial Reconstruction (BIFR). The agency received 3,761 cases up to November 30, 1999, against 2,504 cases received up to December 31, 1996 -- a net increase of 1,257 cases, or roughly 400 references per annum. But in the two years before 1996, the agency received, annually, only a little over 100 proposals.

The Economic Survey released by the Ministry of Finance prior to the presentation of the Budget 1997, noted with satisfaction the fact that there then existed a declining trend of cases before the BIFR. From 193 cases referred to it in 1994, the number fell to 117 the following year, and declined further in the nine months ending December 1996 to 97.

A reference to the BIFR is, of course, one manifestation, albeit an extreme one, of the corporate sector finding the going tough in an era of greater openness in the economy.

There are other parameters of distress, too. The National Council of Applied Economic Research publishes every quarter an index of Business Confidence. Its figure of 122 for April 2000 is, no doubt, a high for recent times. But a more significant point is that this number really takes the level of confidence back to a high last witnessed only in 1995.

In other words, the corporate sector today feels no more confident about the future than it did five years back. An equally dismal picture emerges from an analysis of the trend of non-performing assets. From a figure of Rs 47,000 crore in March 1997, the figure went up to Rs 58,000 crore by March 99. If the trend of growth is any indication, the figure for March 2000 is unlikely to have shown any dramatic reversal of fortune.

But a perception of distress, however runs in the face of anecdotal of evidence of superior performance of the corporate sector. One is not thinking of the software sector alone, in this context. The country today produces twice as much cement than it did before the start of economic reforms. In 1989-90 the output of cement was placed at 45 million tonnes. In 1999-2000 the output went up to nearly 100 million tonnes.

Similarly, the steel output, which was less than 10 million tonnes in 1989-90, is now close to 26 million tonnes. True, there are sectors where growth has been sluggish, if not declining. But this is only to be expected considering the diverse manufacturing base the country has established over the years. Industrial output, as a whole, grew at close to 7 per cent in this period. Not too bad, considering that the sector grew just 6.6 per cent during the 1980s. But the sense of despair persists.

This is not altogether surprising. The fact of the matter is, the corporate sector is increasingly finding that the profit margins are constantly squeezed. Two things have combined to make this a reality. The Central Government's policy of lowering the barrier to external competition is one. The other factor is that, thanks to a policy of liberalisation, the barriers to entry by domestic players, too, have been practically eliminated. This has enhanced the competitive pressure on existing and fresh players alike, leading a tremendous loss of business confidence.

First, the lowering of barriers to external competition. Since 1991, the governments at the Centre have followed a policy of lowering the Customs duty best exemplified by the reduction in peak rates of customs duty. This rate has come down from 300 per cent to a modest 35 per cent, the rate now in force. In specific sectors, the rate of effective duty protection has gradually come down.

Thus, for instance, the domestic manufacture of chemicals enjoyed a duty protection of 92 per cent in 1990-91 against imports. But the sector has now to make do with a protection rate of just 34 per cent. Man-made fibres are similarly down from 83 per cent to 49 per cent.

To a certain extent, the lowering of tariff barriers has been neutralised somewhat by a decline in the external parity of rupee against other currencies. So profit margins can still be protected. But they pale into insignificance before the squeeze on margins brought about by an increase in domestic competition. It is difficult to obtain a representative figure of increase in the level of domestic competition across the manufacturing sector as a whole.

Anecdotal evidence abounds on the levels of specific sectors. There are now more players for everything, from toothpaste to passenger cars. But some indication of the level of excess capacity created across the economy can be inferred from the figures of gross capital formation in the corporate sector (private and public), and incremental output.

During the 1980s, the corporate sector both private and public, collectively added Rs 223,324 crore (constant prices) which resulted in pushing the output up by approximately Rs 25,000 crore by the terminal year. In contrast, the quantum of capital formation in the 1990s moved well ahead of the increase in output in the same period. While the incremental investment has been roughly Rs 400,000 crore, the output generated additionally between 1989-90 and 1997-98, the latest year for which data is available, was Rs 33,394 crore.

On a pro-rata basis, one could say that such incremental output would have required only an marginal investment of the order of Rs 295,000 crore (approximate). Since the actual investment is close to Rs 400,000 the slack in productive capacity could be as much as one-fourth of the fresh capacity created (Rs 400,00 - Rs 295,000/Rs 400,000).

Here is a synopsis of what happened. In the first flush of enthusiasm from the ushering in of a policy of liberalisation, entrepreneurs rushed in to create manufacturing capacity. The decision was also helped by a wave of optimism in the capital market and lending institutions at large about investment prospects. But in more recent years, there is a better awareness of investment prospects and a new sense of moderation has crept in. It is, therefore, only a matter of time before the slack in existing productive capacity is used up, to unleash, in its wake, a fresh dose of exuberance.